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Of Special Interest ...examining a significantly timely topic

Mar 27 2025

Dot-Com 25th Anniversary Series Part 4: Listening For The Siren’s Song

  • Mar 27, 2025

Extended bull markets are the primary attraction of equity investing and play an integral role in generating long-term returns.  However, investors must take heed when psychological excesses turn a garden variety bull market into mania-induced price chasing.  Instead of reaping the customary gains offered up by a typical bull, the risk and reward tradeoffs become exponentially larger when exuberance overpowers prudence.  Recognizing the difference between a bull market and a bubble is critical for building a respectable long-term track record.   There are subjective attributes common to most manic equity markets, and although these signposts are not mechanical or quantitative, taken together they tell a coherent story.

Mar 25 2025

Dot-Com 25th Anniversary Part 3: What If You Bought The Peak?

  • Mar 25, 2025

With yesterday commemorating the 25th anniversary of the S&P 500 Y2K peak, it’s worth evaluating the long-term results of the unlucky purchases of U.S. equities occurring at that time. Of course, it’s doubtful that many investors decided to dump their money-market funds and go “all in” on stocks that day. Instead, think of this analysis as a review of how one’s dutiful, monthly 401(k) contribution for March 2000 has likely performed over the subsequent 25 years.

Mar 18 2025

Dot-Com 25th Anniversary Series Part 2: Confusions And Delusions

  • Mar 18, 2025

This essay takes a broader view of Manias, Bubbles, Panics, and Crashes by expanding on these terms, considering the benefits of studying stock market bubbles, and looking for commonalities that mark each phase of a euphoric price cycle.  The most practical reason to study bubbles and crashes is the simple fact that they appear far more often than one might expect. Rational investors may be inclined to dismiss the periodic appearance of bubble conditions as just so much noise and frivolity, leaving us to focus on real world issues like the economy, profits, and expected returns. However, we believe the impact of manias and crashes on investment performance over an entire career is significant to the point of being decisive, and that is the most compelling reason to study the history of financial manias.

Mar 07 2025

Dot-Com 25th Anniversary Series, Part 1: Internet Insanity

  • Mar 7, 2025

It was 25 years ago this month when the legendary dot-com mania reached its crescendo, entering market lore as one of the greatest bubbles in history. This silver anniversary prompted us to create a month-long series of articles under the banner of “Manias, Bubbles, Panics, And Crashes.” Here we look back at the sheer scale and intensity of the internet craze.

Feb 19 2025

Buffered Bulls

  • Feb 19, 2025

Defined Outcome and Derivative Income ETFs each offer attractive features in the form of modified payout or income characteristics. However, these benefits come at a cost of limited upside, and a “buyer beware” approach should be taken to weighing their pros and cons. Sustained bull markets reveal the true impact of trading potential upside for considerable benefits in the here and now. This study attempts to quantify the opportunity costs of capped funds using 2023-24 as a particularly harsh test case.

Feb 07 2025

Research Preview: Selling Calls In An Extended Bull Market

  • Feb 7, 2025

Broad investor interest has validated the attractiveness of buffer and covered call funds. An important part of understanding these ETFs is having a solid grasp of the upside participation that is sold away. The last two years provided a perfect environment to empirically measure the give-up associated with selling calls.

Jan 21 2025

Dissecting Factor Performance In 2024

  • Jan 21, 2025

This study provides an initial look at 2024 factor returns, paced by a 25% gain for the S&P 500 index. Three factors topped the S&P (one by just a smidgen) while eight fell short, a ratio we will later see is typical for exuberant bull markets. Of the laggards, six trailed the S&P by more than 10% with a seventh just sneaking inside that ignominious cut point, and their shortfalls contributed to an average factor spread of -6.3% for the eleven contenders.  We also find that 2024 was an echo of an even tougher 2023 when the S&Ps 26.3% return was also driven by mega-cap growth, causing nine factors to lag the index with an average shortfall of -9.0%. Two consecutive years with similarly spectacular yet narrow S&P returns led to significant underperformance across our basket of factors and motivated us to try to understand more about this phenomenon.

Jan 07 2025

Research Preview: Factors Fizzle In 2024

  • Jan 7, 2025

The turning of the calendar is a time to reflect on the past year’s returns and analyze the relative performance of various asset classes. For 2024, no matter what equity theme is under the microscope, the yearly recap is bound to point to the very same explanation—Nvidia and mega-cap tech.

Dec 23 2024

Collateralized Loan Oxymoron?

  • Dec 23, 2024

A Collateralized Loan Obligation is a special purpose vehicle designed to hold a portfolio of highly leveraged corporate loans in a structure that modifies the risk profile of the underlying loans.  A CLO funds its asset purchases by issuing securities backed by the loan portfolio.  These liabilities are layered in tranches defined by seniority and credit protection, ranging from AAA to B with a final equity buffer at the base of the capital structure.  CLOs have historically been the province of large asset managers, and it is only in recent years that smaller investors have been able to access CLOs simply and easily through an exchange traded fund.  Viewing CLO ETFs as a new option in our fixed income toolbox, we felt a deeper investigation was in order.

Dec 05 2024

Research Preview: CLO ETFs

  • Dec 5, 2024

One of the benefits of exchange traded funds is the ability for investors to access complicated or non-traditional strategies in a simple easy-to-trade wrapper. We recently reviewed covered call funds and buffer funds, two option-based positions that are now available through ETFs. This month, we examine another multifaceted security that has recently become easier to obtain thanks to new ETF launches.

Nov 25 2024

Tech’s “Pick & Shovel” Disconnect

  • Nov 25, 2024

Information Technology has led the market higher this year, gaining 37% to rank as the leader among all eleven sectors as of November 8th. However, there is a return anomaly within this sector that catches our attention. The S&P 500’s Semiconductor sub-industry has risen 96% while the Semiconductor Equipment sub-industry is up just 9%, miles behind the semiconductor group. The divergence seen in Chart 1 seems hard to fathom given the fundamentally interconnected nature of these two business models.

Nov 06 2024

Research Preview: Semiconductor Slippage

  • Nov 6, 2024

With the closely intertwined businesses of semiconductors and semiconductor equipment, it is not surprising that the two industries have historically performed similarly. Yet, in 2024, a colossal disconnect has emerged, with semi-equipment stocks up a paltry 5%, miles behind the booming semiconductors.

Oct 22 2024

The Small Cap Slump: Deep Or Wide?

  • Oct 22, 2024

The relative performance of small caps lags the S&P 500 by 75% since 2018, and we wondered why.  Was the Magnificent 7 effect so exaggerated that Info Tech and Communication Services, the sectors at the epicenter of the mega-cap growth boom, created such an overwhelmingly high hurdle that small caps were not able to keep pace with these powerhouse companies?  Alternatively, has small cap weakness been the product of sluggish results across multiple sectors, irrespective of the mega-cap growth issue, such that large caps were superior no matter which direction you looked? We label these two hypotheses as “deep” (relating specifically to the narrow but intense Mag 7 effect in Info Tech and Comm Services) or “wide” (describing failings across most small cap companies and industries) and designed this study to identify the most likely explanation.

Oct 04 2024

Research Preview: Dissecting The Small-Cap Slump

  • Oct 4, 2024

Small caps turned sour in August 2018, and since then, performance has been nothing less than disastrous. Is the enormous shortfall pervasive across small caps in general, or is it due to a top-heavy market with unusually huge returns from a few huge stocks? The answer may be helpful for those contemplating a contrarian position in this unloved corner of the market.

Sep 23 2024

Quality Checked

  • Sep 23, 2024

Traditionally defensive themes such as Staples and Utilities have outperformed over the summer months, reminding investors of the benefit of not going all-in on the AI growth theme. Quality is one of the most robust defensive factors, but even so has managed to outperform during the bull market run that began in October 2022.  While some Quality funds are designed to play defense, others seem more inclined to the offensive side of the field. We recommend that investors decide if they are targeting Quality specifically as a defensive exposure or as a core long-term holding to ensure they select the appropriate fund.

Sep 09 2024

Research Preview: The Essence Of Quality

  • Sep 9, 2024

With renewed worries about the stock market, investors are pursuing safe-haven ideas—and Quality is a long-time favorite. Yet, despite its defensive appeal, the Quality factor has been a prominent bull-market leader, of late. Are the striking returns of Quality due to outsize exposure to the Mag 7—or have other high-quality stocks been equally fruitful in the latest upswing?  

Aug 27 2024

“Place Your Bets, Place Your Bets”

  • Aug 27, 2024

With Fed rate cuts likely to begin just days from now, the mathematical connection between changing rates and duration means that lower rates are almost certain to result in higher bond prices, an effect that has proven reliable since 2024’s high point in rates last April.  The simple approach of targeting longer durations is complicated by today’s inverted curve, meaning that lower rates will almost surely not manifest themselves through a parallel downward shift in the curve, but will be accompanied by an un-inversion that will return rates to an upward sloping shape.  This twist in the curve’s slope will require investors to target the appropriate spot on the curve to optimize the interest rate effect on bond prices.

Aug 06 2024

Research Preview: Do Fed Cuts Mean Easy Profits?

  • Aug 6, 2024

With multiple rate cuts nearly assured through year-end, investors can profit from the iron-clad link between changing rates and bond fund prices. But there are two circumstances that introduce complexity: 1) the yield curve will likely un-invert during this process, and the longest duration funds may therefore not experience the strongest price response; 2) potential changes in credit spreads may either enhance or diminish the duration effect felt by corporate bonds.

Jul 24 2024

Styles, Boxes, and Paradoxes

  • Jul 24, 2024

Multi-cap funds face two paradoxes that introduce subtle hurdles into their fund analytics. While it is desirable for a fund to rely on a sound investment process and to follow that process consistently, a successful multi-cap fund might not be able to meet both desires simultaneously. Second, a successful multi-cap fund will always be compared to the highest performing peer group while unsuccessful funds will be compared to a less successful set of peer funds. Attentive fund analysts can overcome the challenges we have identified in this study, assuming they are cognizant of the unique issues facing multi-cap and mid-cap funds. This report is intended to arm analysts with just such insights to ensure that benchmark and peer group comparisons are meaningful and constructive.

Jul 07 2024

Research Preview: Defining The Mid-Cap Style

  • Jul 7, 2024

The unbounded nature of large-cap and small-cap styles means that they cover a great deal of territory, while mid-cap stands alone as a bounded style, and such limits significantly influence how a fund is classified. On the other hand, multi-cap is intentionally defined with wide latitude, but shares a style category with mid-caps, despite having little else in common.